Tax relief for pre-trading expenses

A new year signals an influx of goal setting and for some that could mean pursuing their dream of setting up their own business.

Undoubtedly there is a lot involved in setting up a business, and costs will be incurred pre-trading, often these can be of significant value.  What some business owners don’t know is that you can claim tax relief for revenue and capital expenses that were incurred whilst setting up the business. In this article we will look at what counts as pre-trading expenses and how and when you can claim relief on them.

What expenses may be incurred pre-trading?

Pre-trading expenses will vary depending on the nature of business, common costs incurred include;

  • acquiring premises;
  • recruiting staff;
  • buying stock;
  • setting up website;
  • IT costs;
  • advertising and marketing; and
  • travel and subsistence

These costs relate to a business, albeit one which has yet to start trading.

Relief for expenses

Once a business is up and running, relief is given for revenue expenses which are incurred wholly and exclusively for the purposes of the business.

Where the expenses are incurred in setting the business up, relief is available under the pre-trading expenses rules. These allow relief for expenses that were incurred in the seven years prior to the commencement of the trade to the extent that the expenses are revenue expenses which are incurred wholly and exclusively for the purposes of the trade. In this way, the pre-trading expenses rules allow relief for expenses which would have been deductible had the expenditure been incurred once the business was up and running. Pre-trading expenses are treated as if they were incurred on the day on the first day of trading and are deducted in computing the profits for the first period of account.

Example to demonstrate the pre=trading expense rules

Under the pre-trading rules, the rent, staff costs, travel expenses and advertising costs are treated as if they were incurred on 1 October 2021. They are deducted in calculating her profits for her first accounting period.

Stock

No deduction is given for the cost of stock under the pre-trading expenses rules. Stock purchased prior to commencement will form opening stock, and relief against profits will be given for stock sold in the first accounting period.

Capital expenditure

A similar rule to the pre-trading expenses rules applies for capital allowance purposes. Items purchased prior to the commencement of trade where the expenditure is qualifying expenditure for capital allowance purposes are eligible for capital allowances – the qualifying expenditure is treated as if it were incurred on the first day of trading.

Recently started trading.

If you have recently started trading and are unsure whether your set up costs meet any of the pre-trading expenses rules, we are happy to discuss these with you.  Simply call 0800 112 0880 or email hello@focalbusiness.co.uk because a growing business needs more from their accountant.